The rental equivalence approach to nonrental housing in the consumer price index. evidence from Spain

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This paper presents new evidence from Spain that challenges the usual objections to the possibility of applying the rental equivalent approach to determine the weight that non-rental housing services should have in the CPI. Data from the EPFs (Encuestas de Presupuestos Familiares) for 1980-81 and 1990-91 permit a satisfactory explanation of market rents in terms of an index of housing quality, two geographical variables and the year of occupancy. These regression results provide a way to impute a rental value to non-rental housing units that takes into account the possible selection bias induced by systematic differences in housing characteristics between the market rental sector and the non-rental stock. On average, such hedonic values are not that different from the self-imputations provided in the EPFs by the occupants of such dwellings. Therefore, the consequences for inflation of using either of the two alternatives to assess the importance of non-rental housing in the CPI system are small. Instead, if non-rental housing services are dropped from the CPI, then it is estimated that the bias in the measurement of inflation during the 1995-2000 period would be 0.35% per year. The lesson is that, given the alternatives, eliminating non-rental housing services from the CPI -as is done at present in Spain and several other European countries- is an unnecessarily crude form of dealing with a difficult problem
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